The Delhi based state owned lender Dena today announced to offer home loan at 8.25%, leaving behind industry leader SBI in terms of the cheapest loan rate offered by any player.

The country’s largest lender State Bank of India (SBI) in early November announced to give home loans at 8.3%, which was the lowest rate being offered by any bank so far.

Dena Bank’s offer is a part of the retail loan carnival that begins tomorrow and stretches until the end of this calender year. The ‘Dena Retail Loan Carnival’ promises offer loans in the range of 8.25% – 9%from November 16, 2017 to December 31, 2017.

The bank said the carnival is being launched to promote housing and vehicle loans. It would provide home loans up to Rs 75 lakh at 8.25% p.a. and car loans at 9% p.a..However, women borrowers would be offered car loans at 8.90 per cent.

Dena Bank said it would not charge any processing or documentation fee on the loans that will be processed during the carnival. Customers could contact any branch of Dena Bank for availing the loans, it said in a statement.

The State Bank of India has cut is benchmark lending rate by 0.05 per cent across maturities, effective from Wednesday, according to an announcement by the state-run lender.

The reduction in marginal cost of funds based lending rate (MCLR) by the largest Indian bank, last made on January 1 this year, has thus brought its MCLR down to 7.95 per cent from 8 per cent, the SBI website said.

The MCLR on overnight borrowings has been reduced to 7.70 per cent from 7.75 per cent, while the rate for three-year tenures has been lowered from 8.15 per cent to 8.10 per cent.

On Tuesday, another public sector lender, the Kolkata-headquartered Allahabad Bank reduced their MCLR by 0.15 per cent across maturities. The reduction has brought down the one-year MCLR to 8.30 per cent, as against 8.45 per cent, effective November 1.

At its fourth bi-month monetary policy review here earlier in the month, the Reserve Bank of India kept its key interest rate unchanged at 6 per cent, reiterating its call for better transmission by the banks of earlier rate cuts made by the central bank.

The recent decision of the RBI to stick on with the existing repo rate, disappointed many Developers. The Apex Bank, in its recent Monetary Policy report, has revealed that the overall experience with transmission of monetary policy since switch over to MCLR (Marginal Cost of Lending Rate)regime from the base rate has not been fully satisfactory as the switch over to an external benchmark in a time-bound manner as internal benchmarks such as the base rate/MCLR have not delivered effective transmission of monetary policy. It was revealed that the arbitrariness in calculating the base rate/MCLR and spreads charged over them had undermined the integrity of the interest rate setting process. The base rate/MCLR regime is also not in sync with global practices on pricing of bank loans. The system of MCLR was introduced to make monetary transmission more effective in order to ensure that the benefits of a rate cut by the RBI reach the common man. Under the earlier base rate regime, in the event of the RBI reducing the repo rate (rate at which the RBI lends to banks), banks were generally slow in making a corresponding reduction in their base rate. The MCLR reform had been introduced to offset this situation. The Apex Bank, by fixing the bank borrowing rate to a fixed margin over and above the repo rate would reflect the credit worthiness of the borrower, which inturn would be constant unless banks have credible reason to believe there is a change in the borrower’s risk profile. This measure will ensure that banks do not delay transmitting the central bank’s rate cut benefit to the consumers over the loan tenure. Would RBI implement this measure? Would RBI take any action against the erring banks, who are reluctant to pass on the benefits of rate cuts to the borrowers? Would loan pricing ever be unbiased and unprejudiced to borrowers’?

It came as a bolt from the Blue for the Real Estate Developers, when RBI announced that there would be no rate cut in the REPO rate. Most of them were disappointed with this move of the RBI, since the reduction in the policy rate could have boosted the otherwise dull real estate, which is already overburdened with the implementation of plethora of legislation and measures such as RERA, GST and Demonetisation. A leading real estate research firm avers that in the present macroeconomic situation in terms of higher than expected inflation and unexpected spike in fuel prices, the industry was not expecting a rate cut. However, a cut in the policy rate could have helped stimulate realty growth and demand which has slowed down after the note ban. Another leading developer avers that if the continuous price pressure are going to limit the room for further rate cuts, the government may have to step in to boost the spending that may have an impact on its budget deficit target. A rate cut now would not only have provided much needed cushion to the economy, but would have also added thrust to government initiatives on affordable housing. The real estate industry is already under immense pressure owing to rise in input costs which have put severe strain on profitability. Another Developer averred that the buyers have embraced the enactment of RERA, which is touted to be a buyer friendly legislation, a rate cut in the RBI, would have further boosted their confidence and would have led them to invest, particularly in the festive season of Diwali. Another leading real estate developer opined that while the residential sector expects enhanced activity levels in the ongoing festive season, home-buyers hoping for a further dip in borrowing costs could still get some relief as some banks may consider lowering their lending rates to leverage the festive season. Another real estate consulting company is of the opinion that the government needs to initiate a proper drive to close several gaps in infrastructure and investment, and enhance the ease of doing business ensuring faster roll out of the affordable housing program and rationalisation of excessively high stamp duties by states.

The Reserve Bank of India has kept its policy rate unchanged. This has been recorded as seven year low of 6% despite a sharp slow down of economic growth after a surge in consumer inflation to a five month high. The reverse repo rate by the RBI is only at 5.75% and its cash reserve ratio is only at 4%. Repo rate is the rate at which the Banks borrow from RBI, whilst CRR refers to quantum of funds to be kept with the Apex Bank compulsorily. Lowering of repo rate helps banks borrow cheaply from RBI and therefore helps keep their cost of funds low, this in turn helps individual borrowers to take credit at lower interest rates from banks. With the Apex Bank keeping the rates unchanged, the banks are now forced to cut their lending rates. The extent to which the banks could offer lower rates would only depend on the statutory liquidity ratio by 0.5%, which has brought down the margin to 19.5%. The cut in SLR provides liquidity to the banks as that much funds is made available with them for lending. Banks have to maintain a stipulated proportion of their net demand and time liabilities in the form of liquid assets like cash and gold to form part of the SLR. Would RBI lower the lending rate despite request from all the quarters to reduce due to rising inflation? Could the national fiscal stance be described as tight? Why doesn’t RBI give any gain despite seeing the pain?

Investment, in the form of Property, is a dream come true, for every Indian individual. It is strongly rooted in the belief system of an average Indian, that the investment in the realty sector or purchasing a house, is considered a matter of pride and prestige among his family and folks. Most of the home buyers, do not have the entire cash in hand, in order to purchase the property. That is the time, when the Bank steps in to help the home buyers realise his dream of owning a home. The vital question, that an individual forgets, in his happiness of owning a home by loans or paying EMI is that what determines the loan amount?

The answer is Loan to value (LTV) ratio. LTV ratio is the proportion of property’s value that would be financed by the lender and it denotes the amount that a borrower or a home buyer would have to arrange out of his own resources, for buying home. This ratio is set by the Lenders whilst keeping in mind, the various risks involved in lending to a home buyer or a borrower. The higher the LTV ratio, the lower would be the down payment that a buyer would have to make, whilst purchasing a house.

The Banks and the Housing Finance Companies have an upper limit of 90% LTV ratio on home loans upto Rs. 30 lakhs, 80% on home loans between 30 to 75 lakhs and 75% on loans over and above 75 lakhs. Does this mean that every home buyer in this slab gets maximum permitted sum? What are the factors that the lender checks out, before lending loan to the home – buyer?

The first determinant factor, whilst granting a loan by the Lender is to consider the credit score whilst setting the LTV ratio for a home buyer or a borrower. People with lower credit score carry high risk of defaulting in loan repayments. To combat this, the Lender try to minimise their lending risk by providing lower loan amount against the property value.

The second determinant factor, is the age and job profile of a prospective home buyer or a borrower. The legitimate expectation of every lender, is that a home buyer should complete, the repayment of Loan, before the age of 70. Therefore, the home buyers/borrowers, nearing their retirement, are required to make higher contribution towards their home purchase. Does this mean that opting for a co – applicant of lower age be considered for a lower amount? The answer is no, since the age of older co – applicants are considered.

Does this also mean that the salaried employees are offered higher LTV ratios when compared to the self – employed applicants? The answer is yes, due to higher income certainty, that a salaried employee is offered. The salaried employees with similar profiles, may more often than not have similar LTV, since the employees working with reputed organisation are offered higher LTV ratios as the credit risk associated with them is lower.

The third determinant factor, is the ratio of financial obligations to the income. This is calculated by taking into account and consideration, the proportion of total income that would go towards the EMI of the new home loan and other payment obligations such as house rent, existing EMIS, insurance premium, etc. The Lenders, in this factor, prefer, the ratio to be 40% t0 50%, the excess of which would lead to increased term of repayment or decrease in the LTV ratio.

What would be the LTV in the case of affordable homes? Would the Banks, Housing Finance Companies and Financial Lending Institutions, charge lower interests for loans below 30 lakhs?

The Housing Finance Market in India, has been one of the most predictable loan industry in India. There has been a steady demand from many of the first-time home buyers, who borrow loan to invest in their homes, which most often than not, they occupy. Hence, the defaults here are at the lowest, particularly the luxury homes. Another reason for the growth in housing market finance, was that the corporate loan growth, which had slowed down in the last few years, had prompted most of the banking and the non – banking companies to make a shift in loan segment towards residential real estate.

Currently, the growth of home loan sector, has slowed down rapidly. A data of the RBI reveals that the growth in bank lending towards home loan sector, slowed to 10% year on year. The overall credit growth was 5 to 6%, which was way lower than the previous year’s 17 to 18%. The slow-down in the home loans sectors is also due to the stagnancy in the real estate sector. The new regulations passed by the Government, make it compulsory for the Developer to register his project with the RERA regulating authority. Therefore, the Banks are unable to offer loans to a prospective buyer, seeking loan, since for disbursing loan, RERA registration number is mandatory. A research report of a leading real estate consultant firm reveals that the new residential real estate launches had dropped to 41% to a seven-year low and sales volume had dropped down to 7%.

What is the reason towards the slow down? Is it because of presence of an adverse base effect? Is the loan demand shifting from Banks to NBFCs? Or is there a slow-down in demand due to the haphazard implementation of GST and RERA?

In the present economic situation of falling interest rates, it is an open opportunity for home buyers to minimise their cost of home purchase. The perfect time to purchase one’s dream property at an affordable loan rate. Even the existing home loan borrowers will be able to save large amount of money through refinancing of their loan.

Refinancing can be defined as the process of paying off an existing loan with the proceeds from a new loan, usually of the same size, and using the same property as collateral. It simply means to take a new loan for repayment of your existing loan. The terms and conditions of the new loan should be such which offers an advantageous position or substantial savings to the Borrower as compared to the old loan. For refinancing to be viable, the proposed savings should be larger than the component of cost involved in it. Normally, the refinancing option can be exercised only upon payment of a penalty or fee.

Why refinance?

Refinancing is done mostly for two reasons- savings or modification of deadline for loan payment or both.

When a person swaps the existing loan with another loan at a lower interest rate, then the difference in interest rates automatically make way for savings.

On refinancing, the borrower gets an extended deadline for repayment of loan by undertaking a new loan. Like a person who needs to pay off a loan in near future but does not have the funds for repayment, can refinance his loan. This prevents the Borrower from becoming bankrupt.

Similarly, the extension of timeline can be used for reducing the EMI payments payable to banks.

For some people, it maybe the long duration of loan is a cause of concern. By entering into a loan agreement with new terms and conditions, the timeline for loan repayment can be drastically shortened. This leads to savings in terms of reduction in number of interest payments.

Another reason for refinancing can be to switch from a variable rate to a fixed rate loan or vice versa.

In case of multiple loans, one can use refinancing to consolidate those loans into one single loan especially for an offer of lower interest rate. It also makes tracking of the loan and interest payments easier.

Benefits of refinancing.

1. Savings: A common reason for refinancing is to save money on interest costs.

2. Improved cash flow: Refinancing can lead to lower EMI payments due to the extension of timeline for loan repayment. This enables easy cash flow management and addressing of new expenses.

3. Reduction in loan amount– The loan tenure is inversely proportional to the amount of EMI payments. This means the higher the tenure, the lesser the amount of your EMI payments and vice versa.

4. Early loan exit– If there is an increase in the cash inflow, one can be free from loan by making larger EMI payments for a shorter loan term.

5. Modification of loan terms like fixed rate to fluctuating rate of interest or vice versa, to suit the present financial standing of the individual or to meet the present and future expenditures.

6. Deployment of money into other investments– If you are planning to make another investment, refinancing is a smart move for diversion of funds into other profitable ventures provided you are good at financial planning and management.

7. Improved credit rating– As the existing loan is paid off before due date, it improves or maintains the credit rating of the individual which is important for securing future credit requirements.

Checklist before refinancing

Refinancing is beneficial. However, there are some factors which need to be taken into account before jumping into the decision of refinancing.

Transaction costs: Refinancing can be expensive if the closing cost involved in a loan is too high.

Additional interest costs: Though one enjoys lower EMI payments on an extended loan period, it may actually lead to higher amount of interest payments in totality.

Lost benefits: Some loans have important features that may go away on refinancing. For example, a fixed-rate loan might be ideal if interest rates are high even if you temporarily get a lower rate with a variable rate loan.

It is important to remember that refinancing should be done only when the aforesaid factors are outweighed by the positive outcomes of new arrangement. Also be mindful of the fact that though refinance conveys alteration in financial management, there are certain ground realities which remain unchanged.

1. Existence of the same amount of debt or more in case closing costs are involved.

2. Risk of losing the same collateral security – property in case of home loan, on non-repayment.

3. Be aware of the new payment structure and its components, to evaluate its long term impact on your financials.

4. Refinancing your home loan comes at a charge, which differs from bank to bank. Make sure that the profit you make by opting for refinancing is higher compared to the fee and charges you pay. In most of the cases, it is profitable

Refinancing is a calculated move and therefore, one needs to be aware of the discussed factors, in order to reap the potential benefits out of it. In the current scenario of skydiving interest rate, it is the perfect time for refinancing of home loan. From a micro perspective, an individual has to do the required math and proper balancing between payments and savings, to qualify for the advantages of refinancing of home loan.